Africa looks to bond markets for infrastructure financing

from This Is Africa..


June 24, 2013

Countries are accessing global capital markets to finance their huge infrastructure requirements, but domestic markets will also provide an important source of funding

Africa’s infrastructure financing needs are rising as economic growth continues at above 5 percent, and countries are increasingly looking to capital markets to meet their funding needs. According to the African Development Bank, Africa requires infrastructure financing of around $93bn annually until 2020 in to order meet development targets. It currently faces a shortfall of $31bn per annum.

Eurobonds – or debt denominated in foreign currency – have been issued by a handful of African countries over post-crisis years, as they take advantage of the global investor hunt for yield to finance infrastructure projects. Since Zambia’s successful bond issue in 2012 – which was 15 times oversubscribed and raised $750m – appetite for those issuances has picked up.

Zambia’s bond is being used to develop power projects in Itezhi Tezhi and Kafue Gorge, as well as to develop the national rail network, the country’s minister of finance Alexander Chikwanda has stated publicly. Following suit, Rwanda raised $400m this April in its debut dollar bond issue, using $50m of that total to develop a hydropower plant, and a further $200m to develop a both a convention centre and its national carrier, RwandAir, according to the country’s investment prospectus. Angola, Nigeria, Ghana and Kenya – all on stable or positive ratings – have plans to issue this year, with similar ambitions to fund their infrastructure needs.

“You are starting to see a diverse group of African countries, who in the past could not have tapped either domestic or foreign markets for infrastructure financing, finding very receptive investors amongst the global private sector and institutional investors,” says Zemedeneh Negatu, a managing partner at Ernst & Young. “African countries are being smart about it and investing in growth generation projects, which investors see as attractive.”

Regional bodies are also coming to the market. In May, the African Development Bank (AfDB) – which in 2012 tabled plans to issue $22bn in infrastructure bonds – announced the launch of a multi-billion dollar fund to finance infrastructure investment on the continent.

According to observers, the ‘Africa50Fund’ – a special purpose vehicle targeting a single-A rating – may reach up to $50bn in size, making it by far the biggest financing vehicle for infrastructure in Africa. It hopes to raise equity from African countries and developed markets, before issuing debt in the form of bonds. The vehicle will target African central banks and sovereign wealth fundswith its first bond issues, after it will to go to the public debt markets, according to Donald Kaberuka, the AfDB’s president.

“The existing means of financing infrastructure cannot take Africa to the scale that is needed. It is time for greater mobilisation of internal resources,” he says. “For the first time, governors are recognising that this gap in infrastructure will not be filled by public finance. It will be filled by Africa’s own savings and by issuing bonds in the market.”

The lender has identified a pipeline of 176 projects with an estimated value of $144bn, across energy, transport, ICT and water sectors.

Looking local

Countries should now be targeting domestic capital markets to finance the most important local and regional infrastructure projects, the AfDB argues in a recent publication entitled Structured Finance: Conditions for infrastructure project bonds in African markets.

“Given the limited ability of local banks to provide long-term funding and the shrinking international assistance, we are encouraging project sponsors to turn to domestic institutional investors by issuing infrastructure project bonds,” says Cedric Mbeng Mezui, senior financial economist at the AfDB and lead author of the book.

“There is clearly risk appetite from the investment community within Africa itself,” argues E&Y’s Mr Negatu. “There are about $400bn of reserves sitting within the continent, so Africa doesn’t have to go outside to raise this kind of financing for infrastructure.”

Project bonds raise capital for specific stand-alone projects, and repay investors specifically from cash generated by the project, meaning that they apply to infrastructure services where end-users are charged directly through tariffs and fees.

There is little track record for these instruments on the continent, although Kenya has launched five locally-denominated government bonds specifically earmarked for infrastructure, raising almost $120m. In South Africa, parastatals such as the South African National Roads Agency issue bonds to raise finance for projects, but local currency infrastructure bonds have not yet been considered.

In those countries, as well as Uganda, Tanzania, Nigeria, Ghana, Namibia, Botswana and Zambia, many of the conditions required to issue infrastructure project bonds denominated in local currencies are already in place – among them, economic stability, increased pension contributions, and the necessary legal and regulatory frameworks.

But more needs to be done to make this market attractive to sponsors, Mr Mezui says. Barriers exist within the enabling environment, including in the form of national utilities, many of which suffer from financial and governance-related problems. The tariff framework in many sectors is also incomplete. Many countries lack the resources and capacity to prepare bankable public private partnerships projects for the market.

“In order to promote infrastructure project bonds, the key consideration at this stage is that stakeholders have a clear framework for assessing whether projects are suitable for the bond markets. This includes evaluation of the credit features of the project, market conditions, and the costs of execution,” Mr Mezui argues.

The publication flags the refinancing of Nigerian power privatisations and southern Africa renewables power producers, as well as the proposed Abidjan-Lagos Highway as projects capable of tapping local capital markets.

Investors are likely to be drawn to regional projects, Mr Negatu adds. “These are more attractive because the benefits accrue to a number of countries, and the earnings coming from multiple jurisdictions, so the risk profile will be lower,” he says.

“If we were to improve Africa’s infrastructure, GDP growth would be enhanced by up to 2 percent per year,” Mr Negatu says. “Lucky for us there is a lot of money out there looking for yield, and there is definitely a risk appetite amongst the global investment community for African bonds for infrastructure. The key is to make sure that they are structured the right way so that they attract the kind of money Africa needs.”

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